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First- and Second-Moment Exchange Rate Exposure: Evidence from U.S. Stock Returns

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  • Gregory Koutmos
  • Anna D. Martin

Abstract

This study investigates the impact of first- and second-moment exchange rate exposure on the daily returns of nine U.S. sectors from 1992 to 1998. In 17.8% of the cases we detect significant first-moment exposure when contemporaneous exchange rates are used. Moreover, 25.0% of the significant exposures are asymmetric. When the model utilizes one-day lags, 42.2% of the cases are significant and 79.0% are asymmetric. Regarding second-moment exposure, the financial sector displays pervasive sensitivity to exchange rate volatility when using contemporaneous and lagged models. This result is reasonable, assuming that revenues from the sale of derivative products increase with currency volatility. Copyright 2003 by the Eastern Finance Association.

Suggested Citation

  • Gregory Koutmos & Anna D. Martin, 2003. "First- and Second-Moment Exchange Rate Exposure: Evidence from U.S. Stock Returns," The Financial Review, Eastern Finance Association, vol. 38(3), pages 455-471, August.
  • Handle: RePEc:bla:finrev:v:38:y:2003:i:3:p:455-471
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    Cited by:

    1. Koutmos, Gregory & Martin, Anna D., 2007. "Modeling time variation and asymmetry in foreign exchange exposure," Journal of Multinational Financial Management, Elsevier, vol. 17(1), pages 61-74, February.
    2. Vithessonthi, Chaiporn & Tongurai, Jittima, 2014. "The spillover effects of unremunerated reserve requirements: Evidence from Thailand," Journal of Banking & Finance, Elsevier, vol. 45(C), pages 338-351.
    3. Ananda Jayawickrama & Tilak Abeysinghe, 2007. "Exchange Rate Exposure of Sectoral Returns and Volatilities : Evidence from Japanese Industrial Sectors," Microeconomics Working Papers 21925, East Asian Bureau of Economic Research.
    4. Vithessonthi, Chaiporn, 2014. "Monetary policy and the first- and second-moment exchange rate change during the global financial crisis: Evidence from Thailand," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 29(C), pages 170-194.
    5. Jayasinghe, Prabhath & Tsui, Albert K., 2008. "Exchange rate exposure of sectoral returns and volatilities: Evidence from Japanese industrial sectors," Japan and the World Economy, Elsevier, vol. 20(4), pages 639-660, December.
    6. Prabhath Jayasinghe & Albert K. Tsui & Zhaoyong Zhang, 2014. "Exchange Rate Exposure of Sectoral Returns and Volatilities: Further Evidence From Japanese Industrial Sectors," Pacific Economic Review, Wiley Blackwell, vol. 19(2), pages 216-236, May.
    7. Muller, Aline & Verschoor, Willem F.C., 2006. "Asymmetric foreign exchange risk exposure: Evidence from U.S. multinational firms," Journal of Empirical Finance, Elsevier, vol. 13(4-5), pages 495-518, October.
    8. Vithessonthi, Chaiporn & Tongurai, Jittima, 2013. "Unremunerated reserve requirements, exchange rate volatility, and firm value," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 23(C), pages 358-378.
    9. Bessler, Wolfgang & Kurmann, Philipp, 2014. "Bank risk factors and changing risk exposures: Capital market evidence before and during the financial crisis," Journal of Financial Stability, Elsevier, vol. 13(C), pages 151-166.
    10. repec:eee:ecofin:v:42:y:2017:i:c:p:513-530 is not listed on IDEAS
    11. repec:rfa:aefjnl:v:5:y:2018:i:1:p:14-28 is not listed on IDEAS
    12. Söhnke M. Bartram & Gordon M. Bodnar, 2007. "The exchange rate exposure puzzle," Managerial Finance, Emerald Group Publishing, vol. 33(9), pages 642-666, August.
    13. Aysun, Uluc & Guldi, Melanie, 2011. "Exchange rate exposure: A nonparametric approach," Emerging Markets Review, Elsevier, vol. 12(4), pages 321-337.
    14. Chung Y. Peter & Zhou Zhong-guo, 2012. "The Pricing of Time-Varying Exchange Rate Risk in the Stock Market: A Nonparametric Approach," Studies in Nonlinear Dynamics & Econometrics, De Gruyter, vol. 16(1), pages 1-33, January.
    15. Muller, Aline & Verschoor, Willem F.C., 2006. "Foreign exchange risk exposure: Survey and suggestions," Journal of Multinational Financial Management, Elsevier, vol. 16(4), pages 385-410, October.
    16. Gamini Premaratne & Prabhath Jayasinghe, 2005. "Exchange rate exposure of stock returns at firm level," International Finance 0503004, EconWPA.
    17. Gounopoulos, Dimitrios & Molyneux, Philip & Staikouras, Sotiris K. & Wilson, John O.S. & Zhao, Gang, 2013. "Exchange rate risk and the equity performance of financial intermediaries," International Review of Financial Analysis, Elsevier, vol. 29(C), pages 271-282.

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